Muniland: Medicaid Crowding Out, Narrower Revenue Base and More Volatile Revenue Sources

After a three year study the State Budget Crisis Task Force, led by advisory board members Richard Ravitch and Paul Volcker, released a seminal and final report on recommended reforms to state budgeting and financial reporting.  The report highlights six main themes impacting state and local government entities: (1) Medicaid spending growth will eat up state budgets and crowd out other needs, (2) Federal deficit reduction threatens state economies and budgets, (3) underfunded retirement promises create serious risks, (4) state tax bases are eroding, narrowing and becoming more volatile, (5) local government mismanagement poses a risk to states, and (6) state budget laws and practices hinder fiscal stability and mask imbalances.  SNW AM’s weekly bullets have touched on each of these issues in the past, but this lengthy and in-depth study produced by an esteemed group validates our municipal credit research.  The report concludes that state and local governments face major challenges ahead as structural expense growth crowds out spending on services and supporting revenues become narrower and more volatile.  We could not agree more.  In future years when tax-revenue levels-off or declines, the states that deal with these issues now will outperform their peers in the municipal bond market.